Altman Z'-Score in distress zone

Rule id: altmanZScore · Version: 2026.04.27-zprime-v1

Microsoft Responsible AI Transparency artefact. One Model Card per ML signal RecoupIQ ships. Generated from lib/modules/intelligence/canonical-warning-adapters.ts, re-runnable with npx tsx scripts/responsible-ai/generate-model-cards.ts.

What this rule does

Altman Z'-Score (private-company variant, 1983 fixed coefficients) places this company in the DISTRESS zone. DISTRESS zone (Z' < 1.23) has historically high two-year bankruptcy rate.

When it fires

• Severity (when fired): High
• Confidence in detection (when fired): high

Severity is bounded by the magnitude observed. Confidence is bounded by the number of independent dimensions that agreed. The two are deliberately separate: a High warning at high confidence has very different triage weight from the same rule at confirmed confidence.

Inputs

Evidence the rule cites when it fires (illustrative, actual values vary per company):

• Altman Z'-Score (1983), Z' = 0.85. Zone thresholds: SAFE > 2.90, GREY 1.23-2.90, DISTRESS < 1.23.
• Z'-Score components, X1 (working-cap ratio) -0.10, X2 (equity ratio) 0.05, X3 (EBIT ratio) -0.08.

Known false-positive triggers

Documenting where the rule is most likely to mis-fire is a Responsible AI Transparency requirement. RecoupIQ surfaces these directly to buyers in the report panel so they triage informed.

• Asset-light service businesses naturally score low on the Z'-Score (X3, X5 depend on operating assets).
• The 1983 coefficients are not retrained on modern UK SMEs; treat as a directional screen, not a calibrated forecast.

Recommended next steps

Read alongside the trajectory and sector-percentile panels for the underlying weakness. DISTRESS-zone with deteriorating filing-latency and capital-bleed is a stronger compound signal.

Notes on language: this is process language only, review, verify, escalate. RecoupIQ does not give regulated financial advice ("do not pay", "refuse the contract") in any report. See lib/modules/intelligence/canonical-warning.ts for the validator that enforces this.

Intended use

• Pre-contract due diligence on a UK counterparty.
• Pre-credit-extension sizing for trade credit or invoice finance.
• Post-default forensic evidence pack (Practitioner Pack tier).
• Litigation / SBC adjudication evidence (Practitioner Pack Plus tier).
• M&A / investment diligence snapshot.

Out-of-scope use

• Not legal advice. Always consult a regulated insolvency practitioner, solicitor, or compliance professional before acting on a warning.
• Not a definitive determination of solvency, sanctions status, or director fitness. RecoupIQ reports on public-record signals; the registers themselves are the authoritative source.
• Not a credit score. The signals correlate with but do not predict insolvency probability in any calibrated sense.
• Not suitable as the sole basis for refusing service to a counterparty.

Data sources

Detailed lineage lives in the Methodology page linked at the top of this card. Source registers cited above are the immediate inputs.

Versioning + reproducibility

Reports stamp the rule id + version ([email protected]) in their footer. To reproduce an older report, pin the same version of lib/modules/intelligence/canonical-warning-adapters.ts from git and re-run the screen.

Right of reply

Subjects of any fired warning may submit a structured rebuttal via the Right-of-Reply endpoint linked from every report panel. RecoupIQ does not auto-suppress a warning based on rebuttal, but the rebuttal is recorded against the report and surfaced in any downstream version.